Friday, April 10, 2020

Why Price Inflation is Going to be Much More Fierce Coming Out of the Lockdown Than It was Coming Out of the 2008 Financial Crash

Jay Powell, Fed chairman and mad money printer,

AJO writes at the post, Why I Expect an Acceleration in Price Inflation After the Lockdown is Over:
I'm an EPJ Daily Alert subscriber, thank you for the money you have made me in the past few years.

Can you address the "dollar destruction" and dollar bull wing of the Austrian school. They see the dollar going up in value because of foreign demand for dollars in a credit squeeze. Also, many Austrians have been looking for inflation since the last stimulus, but a lot of the new money was numbers on balance sheets that never circulated. Why is this time different other than demand restoration and pent up demand? What cash flow mechanisms turn these balance sheet transactions into price inflation? How does it go from monetary inflation to price inflation this time?

I really do appreciate your insights and you have converted me from a perma bear like most Austrians to understanding the cycle better. Can't thank you enough. Just wish I had this knowledge ten years ago.

-RW

As far as the US dollar is concerned there are many countervailing factors.

On the one hand, during a period of economic uncertainty, there can be a flight to the dollar since it is often viewed as a safe haven.

But there is also downward pressure on the dollar because of all the new money the Fed is generally printing out of thin air. There is, however, an additional factor here in that most other countries are also printing money out of thin air. If they print more aggressively than the Fed, their currencies may fall against the dollar. The dollar under these circumstances will look "strong" but it is really a race to the bottom.

There really shouldn't be any Austrian school factions on this subject. Things change over time. You just have to watch the data to get a sense of what are the more powerful influences on the dollar in any given period.

During the Fed money pump at the time of the 2008 financial crisis, a lot of what the Fed did was exchange Fed reserve funds for bank paper, such as mortgage-backed securities. The banks put an awful lot (trillions) back at the Fed as excess reserve deposits. Those funds never hit the economy.

This time it is much different, the money being printed by the Fed (in a complex manner) is going to individuals with checks of $1,200, goosed up unemployment payments, to small businesses and to large businesses and to state and local governments.

It will, literally, in the end, result in trillions of new dollars circulating in the system. It is very different from what Bernanke did during the Great Recession. It is much, much more dangerous. Very few understand this. In Monday's EPJ Daily Alert, I will show just how different.

-RW


9 comments:

  1. Normal unmployment payout doesn't replace the full amount of money you were making while working. The extra $600 is going to help bring some people back up closer to "normal" but it still will be less money than a lot of people were making. So for some it will be more and some will be less. And the $1200 was just a one time thing right? At this point, nobody has recieved any money yet right? The 16,000,000 people unemployed are at least 1-3 weeks behind on expenses night now.

    It is a balancing act, but as long as the economy doesn't stay open what are people going to do? People are going to save and conserve resources untilnthey haveba job.

    When are we coming out of the lockdown? As far as we know we never will. What if we never do?

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    1. Folks either grow the balls for civil disobedience, or they await their next orders from their slave masters.

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  2. Keep in mind that, effective March 26, 2020, bank reserve requirements were reduced to zero. Banks will therefore be able to expand the money supply, theoretically, on an unlimited basis. Funds injected into the market will cause further spikes to price inflation, presumably in areas like food, gas, the stock market, real estate, etc.

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    1. Are banks going to make loans to people on unemployment?

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    2. The interest rate on excess reserves has also been cut to 0.1%, from a 2019 peak of 2.4%. March 3,2020:1.6%. March 15, 2020: 1.1%.

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    3. Right, I'm sure banks are itching to loan out the money, when people are not paying there mortgages or business owners not paying their rents for commercial property.

      BANKS...I repeat...BANKS cause inflation...not individuals. Banks are the ones to watch...not ma' and pa with their Gov checks.

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    4. Caleb & Anonymous,
      Banks aren't going to make loans to unemployed people, but they will make them to small businesses and corporations once the economy is "allowed" (I say that tongue-in-cheek) to re-open. Believe me, I know. I work for a Bank that's several billion dollars in asset size and that's what we plan to do - loan money out once this passes. The Bank I work for is currently looking to make a couple of loans that are several million dollars in size. Also, I know of several people who are actively looking to buy single-family homes; one made an offer on a house that is $300,000 plus in price yesterday. So, when this is all over, there will be plenty of opportunities for banks to loan out money - to individuals, who aren't unemployed, and businesses - with no restrictions as it relates to reserve requirements.

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    5. Interesting NDN,

      Are banks really itching to make loans when things like this are expected.

      https://www.bloombergquint.com/onweb/record-bankruptcies-predicted-in-next-year-as-unemployment-soars

      If so...let me know so I know not to deposit 1 cent in your bank and possibly sell your stock short.

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    6. The quarantine is a failure and Sweden has the right idea by not crippling their economy with it. Yes there needs to be precautions and masks in some areas but bankrupting the world and punishing the average wage earner just will lead to a massive backlash. Violence is already breaking out in California and it will get worse. There are new medications and old medications that work if the FDA would get out of the way with their arcane testing methods. Next the Media should be ashamed of their over the top reporting. The 217-218 flu was nearly as bad and we never had a panic.

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